The Securities Industry and Financial Markets Association (SIFMA), a US-based sell-side trade body, is seeking to address public and regulatory concerns over high-frequency trading (HFT), while branding any attempts to ban the activity as “misguided”.
The trade body has also hit out at financial transaction tax proposals on both sides of the Atlantic.
In a white paper released today, SIFMA said the term HFT had become a “catch-all” for a number of different computer-based trading strategies and that regulators attempting to address public anxiety were lacking a clear definition of the activity.
“SIFMA believes that efforts to ban HFT or other forms of computer-based trading would be misguided and prove harmful to our markets,” it said in the white paper. “Banning such trading likely would significantly reduce liquidity across markets, and the damage caused by this reduced liquidity would outweigh any potential benefits. Moreover, banning any practices that are not easily defined likely would result in overbroad prohibitions that would negatively impact beneficial trading activities.”
Instead, SIFMA said it believed regulators should target specific activities or behaviours known to be abusive or manipulative.
In July, the Securities and Exchange Commission (SEC) approved a rule which aims to give regulators better oversight of the market participants with the largest trading volumes. Dubbed the ‘large trader’ rule, it captures a person or firm whose transactions in exchange-listed securities equals or exceeds two million shares or US$20 million during any calendar day or 20 million shares or US$200 million during any calendar month.
As of September, entities that meet the threshold are assigned a unique ID number to give to their broker-dealers, which are required to maintain transaction records for each large trader and report that information to the SEC upon request. Firms that do not use a third-party broker to access markets are required to keep their own records.
In Europe, the Markets in Financial Instruments Directive (MiFID II) contains proposals designed to prevent HFT from abruptly withdrawing liquidity from Europe’s securities markets. To date, the regulators have refused to delineate HFT from broader algorithmic trading. Despite widespread industry criticism, the European Commission is currently standing fast to proposals which would mean both algorithmic and high-frequency traders will face mandatory continuous trading throughout the trading day, with liquidity to be provided on a regular and on-going basis, regardless of market conditions.
As part of MiFID II, the Commission’s proposals will now pass to the European Parliament and Council of European Union, with the expectation that the three bodies will come to an agreement by the end of 2012. The Commission estimates a substantial implementation period will then be granted, with the rules to take effect by the end of 2014.
“Confidence in our markets is the foundation for market efficiency, capital formation, economic growth and job creation,” said Randy Snook, executive vice president for business policies and practices at SIFMA. “High-frequency trading, while attracting many headlines over the last couple years, is not clearly understood.”
In defence of electronic trading, SIFMA maintained that the transition to an electronic securities market had benefited all investors, adding that they now enjoyed more liquidity, narrower spreads, and lower costs than at any time before.
Nonetheless, SIFMA noted regulators and the public had valid concerns regarding computer-based trading, and the trade body identified areas it believed might warrant further study and possible regulatory action, such as limits on excessive market data traffic, ensuring market data quality, maker-taker pricing/rebates and access fees, and market maker incentives and obligations.
Additional areas SIFMA has identified for empirical study included examining micro-level volatility, identifying secular changes related to the accelerating news cycle, and identifying particular HFT behaviour which may contribute to undesirable market volatility.
SIFMA attacks transaction taxes
SIFMA said financial watchdogs should drop a number of proposals, which it believed could have significant unintended negative consequences. Atop the list were financial transaction taxes and imposing artificial limits on technological advances.
“SIFMA strongly opposes any proposal to establish a tax on financial transactions, such as those proposed recently by European Union regulators and in the US Congress,” the trade body stated. “Such a tax would merely increase costs for all participants, including retail investors and others investing on a long term basis, without addressing any of the concerns that have been raised regarding electronic or computer-based trading.”
In November, two US lawmakers introduced legislation to impose a financial transaction tax on certain trading activities undertaken by banks and investment houses. In Europe, the Commission has proposed a similar tax.
If the tax were imposed on transactions in some financial instruments but not others, SIFMA maintained it would impair trading in the subject instruments and encourage trading in the other instruments. Any such tax could divert electronic trading to non-US financial centres that were not subject to a transaction tax, said SIFMA.